4. Short-term corporate bond funds
Overview: Corporations sometimes raise money by issuing bonds to investors, and these can be packaged into bond funds that own bonds issued by potentially hundreds of corporations.
Short-term bonds have an average maturity of one to five years, which makes them less susceptible to interest rate fluctuations than intermediate- or long-term bonds.
Who are they good for? Corporate bond funds can be an excellent choice for investors looking for cash flow, such as retirees, or those who want to reduce their overall portfolio risk but still earn a return. Short-term corporate bond funds can be good for risk-averse investors who want a bit more yield than government bond funds.
Risks: As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured.
There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds. To reduce that risk, make sure your fund is made up of high-quality corporate bonds.
Rewards: Investment-grade short-term bond funds often reward investors with higher returns than government and municipal bond funds. But the greater rewards come with added risk.
Where to get them: You can buy and sell corporate bond funds with any broker that allows you to trade ETFs or mutual funds.
Most brokers allow you to trade ETFs for no commission, whereas many brokers may require a commission or a minimum purchase to buy a mutual fund.